- Create a complete inventory of all your debts
- Calculate your debt-to-income ratio
- Understand which debts to prioritize
- Know the warning signs of too much debt
Face the Numbers
The first step to conquering debt is knowing exactly what you're dealing with. Many people avoid looking at the full picture because it feels overwhelming. But you can't fix what you don't measure.
Create Your Debt Inventory
Gather statements for every debt you have and record:
What to Track for Each Debt
| Information | Why It Matters |
|---|---|
| Creditor name | Who you owe |
| Current balance | Total amount owed |
| Interest rate (APR) | How fast it grows |
| Minimum payment | Monthly requirement |
| Due date | Avoid late fees |
| Debt type | For strategy decisions |
Common Debts to Include
- Credit cards (all of them!)
- Auto loans
- Student loans (federal and private)
- Personal loans
- Medical bills
- Buy now, pay later balances
- Loans from family/friends
- Mortgage (track separately - it's a different beast)
Sample Debt Inventory
Example: Sarah's Debt
| Debt | Balance | APR | Min Payment |
|---|---|---|---|
| Visa Card | $4,500 | 22.99% | $90 |
| Store Card | $800 | 26.99% | $25 |
| Car Loan | $12,000 | 6.5% | $350 |
| Student Loans | $25,000 | 5.5% | $280 |
| TOTAL | $42,300 | - | $745 |
Key Debt Ratios
These ratios help you understand how your debt compares to your income:
1. Debt-to-Income Ratio (DTI)
DTI = (Monthly Debt Payments / Gross Monthly Income) × 100
What Lenders Look For:
- Under 20%: Excellent - easily manageable
- 20-35%: Good - healthy range
- 36-43%: Warning zone - getting tight
- Over 43%: Danger zone - likely too much debt
Note: For mortgages, lenders typically want total DTI (including the new mortgage) under 43%.
Example Calculation
Sarah earns $5,000/month gross. Her minimum payments are $745.
DTI = ($745 / $5,000) × 100 = 14.9%
This is in the excellent range!
2. Credit Utilization Ratio
Utilization = (Credit Card Balances / Credit Limits) × 100
We covered this in Module 5, but it's worth repeating:
- Under 10%: Ideal for best credit score
- Under 30%: Good - recommended maximum
- Over 30%: Hurting your credit score
Warning Signs of Too Much Debt
Watch for these red flags:
You Might Have a Debt Problem If...
- You're only making minimum payments
- You're using credit cards for necessities (groceries, gas)
- You're hiding purchases or debt from your partner
- You've been denied credit or offered only high rates
- You're using one credit card to pay another
- You don't know your total debt amount
- Debt payments are over 40% of your take-home pay
- You're getting calls from collectors
- You're losing sleep over money
Prioritizing Your Debts
Once you have your inventory, categorize your debts:
Priority 1: Essential & Secured Debts
Missing these has severe consequences:
- Mortgage/rent - you'll lose your home
- Car payment - if you need it for work
- Child support - legal consequences
- Taxes owed - IRS doesn't play
Priority 2: High-Interest Debt
These grow the fastest:
- Credit cards (especially store cards)
- Payday loans (pay these off ASAP)
- Personal loans with high APR
Priority 3: Low-Interest Debt
Less urgent, but don't ignore:
- Federal student loans
- Low-interest car loans
- Medical debt (often negotiable)
Create Your Debt Snapshot
Take a few minutes right now to write down:
- Total debt amount (excluding mortgage): $_____
- Total minimum monthly payments: $_____
- Highest interest rate you're paying: _____%
- Your debt-to-income ratio: _____%